Aluminium glut piling up at hidden Asian warehouses

Falling official inventories of aluminium are offering a deceptive picture of stronger fundamentals, while unreported stocks are surging to record highs, threatening to weigh on already hard-hit prices. The build-up of inventories is off the radar of many investors since most are in unregistered warehouses in Malaysia and Korea and do not figure in official exchange stocks.

Stocks of the metal used in transport and packaging have been steadily falling for the past 20 months in depots certified by the world's biggest and oldest market for industrial metals, the London Metal Exchange (LME).

LME inventories have tumbled 46 percent since February 2014 to below three million tonnes, but much of that metal has merely been moved due to tough, new LME warehousing rules, analysts and industry sources said. While that shift does not increase total inventories, there has been a worrying surge of fresh material arriving in non-LME depots as smelters keep churning out metal.

"In Korea, there's been a build-up of 100,000 tonnes over the past month, over three times normal levels," said Marco Georgiou, head of aluminium at consultancy CRU.

Total Korean bonded port inventories of aluminium climbed to around 700,000 tonnes by the end of November, he added. CRU estimates that total global aluminium inventories, including unreported stocks, have climbed 1.3 million tonnes (mt) this year to an all-time high near 15 mt.

That is likely to weigh on benchmark LME prices, which have shed about a fifth this year, sinking to the lowest levels in over six years to below $1,440 a tonne, mainly hit by oversupply in top producer China.

Focus on Malaysia and Korea:

In Malaysia, there are about half a mt of Chinese aluminium plate stored at warehouse facilities, according to the industry sources. Norway's Norsk Hydro, one of the world's biggest aluminum producers, warned last week of the hidden stocks.

Total stocks have climbed to 13-15 mt after the global market produced about 1 mt more than it consumed this year, Kathrine Fog, senior vice president of corporate strategy and analysis, told a presentation in London. He said the aluminium market next year could see another surplus of up to one mt.

Much of the unregistered aluminium stocks are locked in lucrative financing deals, in which owners sell forward at higher prices and store the metal until the deals mature. Some of that metal is at warehouses that also store LME metal, allowing the owners to quickly register it on the exchange if futures spreads improve.

Over the past two days, LME stocks have seen two big increases at Rotterdam totalling nearly 70,000 tonnes.

That material is probably being delivered by owners of off-warrant material with short positions, bets on lower prices, and more deliveries were likely, said analyst Robin Bhar, head of metals research at Societe Generale.